Treaty-rate protection for non-residents prevails over PAN-linked higher TDS under section 206AA.

Section 206AA does not require deduction of tax at 20% from payments to non-residents where the applicable DTAA provides a lower rate and section 90(2) makes the treaty more beneficial. The Tribunal applied the Special Bench view that tax deducted under section 195 must follow the treaty rate for non-resident recipients, and that section 206AA is only a machinery provision that cannot override the beneficial treaty framework. It also noted that non-residents are not required to furnish PAN in the same manner as residents, and later PAN furnishing by some deductees supported reduction of the demand to that extent. The demand based on the higher rate was therefore not sustainable.

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Issues: Whether section 206AA of the Income-tax Act, 1961, could be applied to require deduction of tax at 20% from payments made to non-residents who did not furnish PAN, notwithstanding the lower rate available under the relevant Double Taxation Avoidance Agreement and section 90(2).

Analysis: The Tribunal followed the Special Bench decision holding that tax deducted at source under section 195 from payments to non-residents is to be governed by the rate specified in the applicable treaty where the treaty is more beneficial. It was held that non-resident payees were not obliged to obtain PAN in the same manner as residents, and that section 206AA, being a machinery provision, cannot override the beneficial provisions of section 90(2) and the applicable DTAA. The later furnishing of PAN by some deductees also supported reduction of the demand to that extent.

Conclusion: Section 206AA does not override the beneficial rate under the applicable DTAA in the case of non-residents without PAN, and the demand based on the higher rate was not sustainable.

Ratio Decidendi: A treaty provision more beneficial to the assessee prevails over the domestic TDS machinery provision, and section 206AA cannot be applied to mandate deduction at 20% where the applicable DTAA prescribes a lower rate for non-resident recipients.

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